Jack in the Box Inc. (JACK) Q2 2010 Earnings Report, Transcript and Summary

Good day, everyone, and welcome to the Jack in the Box Inc. Second Quarter Fiscal 2010 Earnings Conference Call. [Operator Instructions] At this time, for opening remarks and introductions, I would like to turn the call over to Carol DiRaimo, Vice President of Investor Relations and Corporate Communications for Jack in the Box. Please go ahead.

Thank you, Debbie, and good morning, everyone. Joining me on our call today are our Chairman, CEO and President, Linda Lang; our Executive Vice President and CFO, Jerry Rebel; and Senior Vice President and COO, Lenny Comma. During this morning’s session we'll review the company’s operating results for the second quarter of fiscal 2010 and update guidance for the remainder of the year. Following today’s presentation, we'll take questions from the financial community. Please be advised that during the course of our presentation and our question-and-answer session today, we may make forward-looking statements that reflect management’s expectations for the future, which are based on current information. Actual results may differ materially from these expectations based on risks to the business. The Safe Harbor statement in yesterday’s news release and the cautionary statement in the company’s Form 10-Q that will be filed later this week are considered a part of this conference call. Material risk factors as well as information relating to company operations, are detailed in our most recent 10-K, 10-Q and other public documents filed with the SEC. These documents are available on the Investors section of our website at www.jackinthebox.com. A few calendar items to note: Jack in the Box management will be presenting at RBC Capital Markets Consumer and Retail Conference in New York on June 3, and at the Oppenheimer's Consumer, Gaming, Lodging & Leisure Conference in Boston on June 29. Our third quarter ends on July 4 and we tentatively expect to announce results of the week of August 2. With that, I'll turn the call over to Linda.

Thank you, Carol, and good morning. Our performance for the second quarter was generally in line with our overall expectations, excluding lower gains from refranchising due to the timing of a transaction that closed in the third quarter rather than in the second. Jerry will address that transaction and refranchising gains in his remarks this morning. Also Qdoba sales were better than our expectations, and in a few moments, I'll discuss what drove that improvement. Same-store sales at Jack in the Box company restaurants decreased 8.6% compared with a year ago increase of 0.4%. A decrease was in line with the guidance we provided in February. We saw sequential improvement in both one- and two-year same-store sales trends in the second quarter, driven by improvement in transactions and average check. The average check in the quarter was lower than last year, which we attribute in part to several value promotions including the continuation of our $3.49 Jumbo Deal through February and two breakfast promotions: two croissant sandwiches for $3 and two breakfast biscuits for $3. While we've seen an improvement in our California and Texas markets, we don't expect significant improvement in underlying fundamentals at Jack in the Box until high unemployment rates in these major markets for our key customer demographics begin to improve. Looking at our footprint, 44% of our restaurants are located in the 10 states with the highest unemployment while only 2% are in the states with the lowest unemployment. In this environment, we continue to believe the best way for us to drive traffic is by targeting our advertising to reach multiple consumer segments with concurrent messages focusing on both value promotions and premium products. To continue our ad reach, we plan to increase our ad spend in the back half of the year. Throughout the economic slowdown, we've continued to reinforce our position as a premium brand with one of the most varied and innovative menus in QSR. An excellent example of this is the new product platform we debuted in the second quarter, our Grilled Sandwiches. To drive trial of our new Grilled Sandwiches, on February 23, Jack in the Box offered a free grilled sandwich with the purchase of any large drink. Guest response was very good and there was a high attach rate. Our Grilled Sandwiches continue to sell well after the promotion and sustained a high percentage of our product sales mix. In March, we introduced a new higher quality french fry, which are crispier and maintain their temperature longer. These fries have the operational benefit of a shorter cook time and longer hold time. We continue to maintain a robust pipeline of new products in various stages of development and test. Early in the third quarter, Jack in the Box launched a Grilled Breakfast Sandwich that leveraged the popularity of our new Grilled Sandwiches. In April, we upgraded our coffee by introducing a new Kona blend for hot and iced coffee drinks. Kona has considerable brand equity among coffee drinkers and is consistent with our premium positioning. Near the end of April, Jack in the Box launched a "Pick 3 for $3" promotion that leverages the variety of our menu and features hamburgers, fries and some of our distinctive products like onion rings, mini churros and egg rolls. Guests can mix and match any three of eight menu items for just $3 plus tax. This margin-friendly promotion is a great value proposition for our guests and an opportunity for us to drive traffic. And this week, to keep our extensive line of beverages top of mind with consumers, Jack in the Box added a raspberry flavor to our smoothie and real ice cream shakes. Moving onto Qdoba. We're very pleased with our 3.1% increase in system same-store sales during the quarter. We attribute this increase to higher consumer confidence and spending patterns of fast-casual customers as well as several effective marketing initiatives, including a new menu option called Craft 2, which allows guests to mix and match smaller portions of some of Qdoba's most popular items; enhancements to our kids' meals; an effective viral marketing campaign and catering promotions. At both Jack in the Box and Qdoba, our focus on training is favorably impacting service execution and guest satisfaction scores at our restaurants. We saw continued improvement in guest satisfaction scores in the second quarter compared to both the first quarter and a year-ago period. We remain on track with our growth plans including continued expansion of the Jack in the Box brand into new markets. In early April, we opened our first quarter restaurant in Tulsa, Oklahoma. And this week, we opened our first restaurant in Oklahoma City. We also recently broke ground on our first location in the Kansas City area. As we've seen when other new markets open, sales volumes in our new markets exceed our overall system average. In fact, opening-week sales in Tulsa topped $100,000. Throughout the extended economic downturn, we have been effective in continuing to execute the key initiatives of our long-term strategic plan and reducing our cost structure. As a result, we believe we'll be a significantly stronger organization when the economy does turn around and well positioned to achieve our goals. And now, I'll turn the call over to Jerry for a look at the financial side of our business. Jerry?

Thank you, Linda, and good morning. Second quarter earnings were $0.32 per diluted share compared to $0.51 last year. Refranchising gains were lower than last year by approximately $0.15, and below our internal expectations due to a delay in closing one transaction involving 21 restaurants with a new franchisee. That transaction has now closed with estimated gains of approximately $0.10 per share. The restaurant sold during the quarter had lower-than-average sales volumes and cash flow. However, we expect these transactions to be $0.01 to $0.02 accretive to annual operating earnings in addition to generating the $7.5 million in cash proceeds. We did not provide any financing for the two deals that closed during the quarter, as our franchisees' ability to access the credit markets to purchase existing stores continues to ease. As of the end of the second quarter, notes receivable from franchisee related to refranchising activity totaled $7.2 million as we collected $3.3 million during the quarter related to previous transactions. We currently expect third quarter 2010 gains to be higher than third quarter 2009 due to the timing of refranchising transactions. We expect full year gains in the sale of approximately 200 Jack in the Box restaurants to total between $60 million to $70 million, with total proceeds of $85 million to $95 million. The increase in the number of restaurants we expect to refranchise for the year is due primary to transactions such as those that have already closed but had lower-than-average cash flows and gains. The rest of our P&L was in line with our expectations. Restaurant operating margin was 15.2% of sales compared to 16.5% last year. Our focus on cost control helped to mitigate sales deleverage, which we estimate negatively impacted second quarter margins by approximately 190 basis points. Food and packaging costs improved by 70 basis points as year-over-year commodity costs were approximately 1% lower in the quarter. Despite a rise in the beef market, our beef costs were modestly favorable for the quarter as we had 100% of our import 90s covered through April. We continue to demonstrate control over labor cost, as payroll and employee benefit costs were up only 20 basis points despite the 8.6% decline in same-store sales. And we also continue to benefit from lower turnover. As we fall in the third quarter, franchise margins were lower than last year due primarily to franchise sales deleverage. We controlled leases on a majority of our franchise locations and charged franchisees rent based upon the greater of a percentage of sales or a fixed minimum rent. As our underlying rent expense is fixed, lower franchise sales compressed the margins. SG&A decreased by $8.7 million versus last year, as we continue to take costs out of the business. Our refranchising strategy and planned overhead reductions resulted in about $5.2 million of the decrease for the quarter and $8.8 million year-to-date. In addition, roughly half of the $3.7 million decrease in advertising costs in the quarter and $9.2 million year-to-date was due to refranchising. The savings related to refranchising should continue. However, as Linda mentioned, we believe it is important to maintain our advertising wait, particularly in this tough sales environment. This waiting in Q3 and Q4 will result in $5 million to $6 million of incremental spending collectively which is reflected in our SG&A guidance. Facility charges declined by $1.7 million, and these may fluctuate quarter-to-quarter depending largely on capital spending and impairment charges taken in each period. We expect these non-cash charges to be higher in the back half of the year due to the timing of our re-image schedule and again, as reflected in our SG&A guidance. We expect our incentive compensation to continue to be lower than last year in the third and fourth quarters. However, that benefit is expected to be offset by continued higher pension expense which is non-cash. We repurchased 464,000 shares of our stock in the quarter at an average price of $21.54 per share. Through the first two quarters of the year, we have repurchased approximately 2.6 million shares of stock at an average price of $19.44 per share and have approximately $47 million left for repurchases under the terms of our current credit facility and authorized by our board. We also repaid approximately $21 million under our term loan during the quarter as required. Our distribution of sales were up 35% in the quarter versus last year as compared to 14% increase in Q1. The increase was driven by two factors: The number of stores that have been refranchised and an additional 114 locations that are now -- franchise locations that are now being supplied by our distribution centers. So we do expect this line to be higher for the balance of the year. Before I review our guidance for the third quarter and fiscal 2010, I'd like to provide an update to our commodity cost outlook for the remainder of the year. Overall, we expect commodity cost for the full year to decrease by approximately 1%, reflecting the approximate 4.5% decrease there experienced during the first two quarters of the year. Commodity costs are expected to increase by approximately 2% in the third quarter and 3% in the fourth quarter as compared to prior year. The increase in the third and fourth quarters is being driven by higher beef costs, which accounts for approximately 20% of our spend. For the full year, we are anticipating beef costs to be flat with increases in the low double digits in the third and fourth quarters. And we have 40% of our import 90s covered through May at $1.44 per pound versus current market prices in the $1.75 to $1.78 per pound range. The increase in beef costs were partially offset by lower chicken and bakery costs, which combined, also account for 20% of our spend and are expected to be about 6% lower for the balance of the year. Let's move on to the gap, to our guidance for the balance of the year. For the third quarter, we expect same-store sales for Jack in the Box company restaurants to decrease 7% to 9% and system-wide same-store sales for Qdoba to increase from 2% to 4%. For the full year, same-store sales at Jack in the Box company restaurants are expected to decrease 6.5% to 8.5%. And based on stronger performance we've seen at Qdoba, we are raising our full year same-store sales guidance to an increase of 1% to 3%. And diluted earnings per share remains unchanged in the range of $1.85 to $2.05 per share. And lastly, I want to provide a quick update on the restaurants in Sacramento that were involved in the bankruptcy of one of our former franchisees. I am pleased to report that the process to market and sell the restaurants have been successfully completed by the trustee. Of the 70 restaurants involved, 56 has been transferred to five acquiring franchisees to date. One restaurant was reacquired by the company and three were closed. Ten restaurants remain to be transferred to one of the acquiring franchisees, and these transfers are scheduled to be completed by the end of the month. And that concludes our prepared remarks. I'd now like to turn the call over to the operator to open it up for questions. Debbie?

[Operator Instructions] Our first question is from Joe Buckley. [Bank of America Merrill Lynch]

Got a few question about the competitive discounting environment in QSR. Either from our perspective, it looks like it's easing a little bit. I guess I'm curious what you're seeing. And maybe in conjunction with that, let's talk a little bit more about the incremental advertising spend that you're planning in the back half of the year and where that will be targeted.

Sure. Competitive discounting, I would still call it a very competitive environment, not only from the QSR players but also the casual dining players. As you know, Chili's just announced bringing back their 3 for $20 deal in a couple of the targeted markets that are challenged and those are our big markets, California and Texas. So we are seeing a lot of couponing. We are seeing some discounting, heavier discounting I would say, in California. And then of course, Burger King has come off of the Dollar Double Cheeseburger but they've moved on to the Dollar Buck Double [Buck Double], I believe it's called. So that's still a pretty discounted product. But maybe, versus a couple of quarters ago, a little less competitive, however, still competitive. Breakfast was a very competitive daypart, with McDonald's rolling out the value menu. However, I can say our breakfast actually held up pretty well. It was the best performing daypart that we had, and we actually increased our sales mix at the breakfast daypart. And then regarding the ad spend, we have made some shift in our media buys that allowed us to increase or at least not reduce our media weight in the first and second quarter. However, those shifts have been made, and so really the only way to maintain our media weight in the back half of the year is to spend incrementally. So we'll continue with the marketing strategy in terms of spending in three areas: Premium, top-tier products, introductions. So you'll see the Grilled Sandwiches and potential extensions on the Grilled Sandwiches . Value messaging and those messages will be around bundled meals again. We have the Pick 3 for 3 [Pick 3 for $3] and then of course, breakfast bundled meals as well. And then we also have introduced the new Kona coffee which would have some media behind that as well.

Our next question is from Jeff Omohundro of Wachovia.

Just I guess first, a little bit more on the refranchising gains. In the press release there was mentioned of a $0.15 decrease impact related to the timing of such transactions. And then I think about I caught it right. I think Jerry said there will be a $0.10 addition from the 21 unit sale in Q3. I'm just I guess, first, curious about the difference between those numbers.

Yes, Jeff, the $0.15 is really referring to the delta from last year's second quarter. The $0.10 was a deal that we closed in the third quarter that we had originally anticipated closing in the second quarter. That was a new franchisee, sometimes the new franchisees deals take a little longer, with a little extra due diligence on the part of the lender. And that was the case here and that's what shifted that from a Q2 deal into an early Q3 deal. That deal has in fact closed though and was worth $0.10 a share.

So the $0.10 number would be, I guess, the comparable for Q2, I guess?

Exactly, right.

I'm just curious how satisfied you are with the balance of value across the menu, a balance of value with premium, given current sales mix.

Yes, we know that we have to offer value, but we are careful not to significantly erode margins. So when we have put our bundled meals together, for example, the Pick 3 for $3, we're seeing nice early results in terms of the mix. And it's also pretty margin-friendly because we've added in the side items which have the higher margin. So we know we have to offer value, but we don't want to significantly erode margins and we don't want to do anything that will damage the brand long term.

Our next question is from Chris O'Cull with SunTrust.

Linda, McDonald's mentioned recently that they do not expect to see much commodity pressure the balance of the year, so no need to really get aggressive with pricing. How do smaller chains that are experiencing commodity cost pressure respond when you got the 800-pound gorilla not raising prices?

Right. We take a pretty cautious approach on pricing increases, but we will be working with our outside consultants to analyze whether or not there is an opportunity to take price at some point. So that will be worked on with our outside consultants.

Any read yet from the tests that you may have done?

Nothing that we would want to share.

And then, Jerry, boneless beef prices, I mean they spiked in recent weeks but appear to be coming down. What comfort can you give investors when you see weekly spikes in beef prices? I mean for example, how many days or weeks can you be out of the market, and specifically talking about the B-50s [ph], before you have to succumb to paying the higher prices?

Yes, it takes -- Chris, it takes about three to four weeks of the current spot market to work itself into our system. We have some flexibility there. But because the 50s are in fact fresh, there's not nearly as much flexibility with the 50s as there is with the 90s.

Can you tell us what your expectation is for the B-50s [ph] in the back half?

Yes, we are looking at B-50s [ph], plus or minus, about $1 a pound.

Our next question is from Matt DiFrisco of Oppenheimer. Matthew DiFrisco - Oppenheimer & Co. Inc.: I think when you look back at the 3Q from a year ago, you've mentioned something. I think there is an insurance settlement with respect to investments that you had. How much was that in the G&A did that benefit?

Three [Third quarter] last year?

Third quarter or second quarter last year? Matthew DiFrisco - Oppenheimer & Co. Inc.: It was in the third quarter of last year. I'm just trying to figure out. When we look at fiscal 3Q modeling purposes, your G&A has been favorable last two quarters. You mentioned advertising being one source of -- something you consider in the back half a little higher. But I also saw that you had a market performance of insurance. You phrased it as attributable to market performance of insurance investment products that came out and helped offset some pressures in G&A last year.

The mark-to-market on the insurance products in the third quarter, we'll have to get that for you. That's not right on top of my head. But we can get that for you after the call. Matthew DiFrisco - Oppenheimer & Co. Inc.: Okay, but I would assume that's also another source of something that you didn't have in 1Q and 2Q. So also looking at how 3Q, as far as in absolute dollar terms, is not going to be as easy to be controlled, I would guess, or contract on a year-over-year basis?

Yes, we were actually -- if you look at the total mark-to-market differences, say, in the second quarter, we were actually unfavorable by $1.2 million in the quarter. And we still delivered nice reductions in our SG&A cost. And again, the advertising while a piece of it was less than the pure cost reduction, groceries franchising and our overhead cost reductions that we had come out late last year. Matthew DiFrisco - Oppenheimer & Co. Inc.: And then just to understand your same-store sales comments, with respect to unemployment, Texas is obviously one of those states that has below national levels of unemployment. Are you inferring then that Texas is doing stronger than California? Or I think in the prior calls, you were saying California actually, recalling out in the last call, was outperforming your overall markets?

California is outperforming the Texas market. Both improved in the second quarter, but Texas is a more challenged market for us. I think you'd have to look at unemployment among our consumer, among our demographics. So it's the younger male and Hispanic. Matthew DiFrisco - Oppenheimer & Co. Inc.: And I guess you're also looking at when does -- the Texas comparable same-store sales must be more challenging also from a year ago. Is that correct to assume? And when does that sort of normalize for your internal model when Texas looks and feels more like the rest of the country rather than being one of the better performance from a year ago?

Texas was positive up until Q4 of last year.

Our next question is from Jeffrey Bernstein of Barclays.

A couple of questions, one, just on the -- follow-up to the premium versus value discussion, being that you are a smaller player relative to some of your peers, but how do you measure whether you're spread too thin when you kind of split between the premium and the value, for that how do you measure that success? And would you expect with the increased spend in the second half, I mean, is there potential to raise the contribution you're getting from your company and/or franchise stores?

Yes, the incremental spend is coming from the company not from the franchisees. So it is an incremental spend from the company. We do analysis every time we have a product or promotion or value message that gets communicated. So we are able to analyze the impact in terms of sales, traffic and margin related to that particular promotion. So that's really how we know whether or not it's successful.

And I mean, in terms of the idea of being maybe spread too thin, like how do you get comfortable that it wouldn't be better to go all value, all premium at a point in time rather than kind of trying to be all things to all people.

Yes, really, we have done several different scenarios and tested different scenarios. And we believe that you need to see the message, so it's important to have enough weight behind the message to generate the traffic if it's a value message or new product introduction. But over time, after a couple of weeks of seeding them, we are able to put weight behind both of those messages effectively.

And then just separately, can you give us an update on where we stand on the restaurant re-image program, perhaps the cost and the comp lift and how much more time we think till that'll be fully completed?

Yes, we are a little better than 50% complete on the full remodels. All of them has been completed on the exterior, and we continue to roll through the remainder of the interiors. We expect to be through with those by the end of fiscal 2012. What we've said, without providing a lot of detail, is that the remodeled locations, their sales are holding up better than the locations that have not been fully re-imaged. So we feel it's important to continue with that re-image program. And we're currently, in terms of the mix, about 2/3 of the company-operated locations are completely re-imaged as of now.

Our next question is from Robert Derrington of Morgan Keegan. Robert Derrington - Morgan Keegan & Company, Inc.: Question if I could on your beef -- your commodity outlook. We've listened to some handwringing over higher beef prices. But, Linda, one thing that I think typically purchasing has done pretty well is contract and do it pretty well. So I'm just curious, when we look at the overall plus 2% for Q3 and plus 3% in Q4, your product mix generally are margin-favorable products. How much of those higher commodities can you offset with your mix, typically?

Well, we do factor in the commodity cost, and we have done a really good job in designing and recipe-ing products and putting together value promotions that are, as I said earlier, margin-friendly and actually have a lower food cost. So I think there is some benefit to that, especially something like the Grilled Sandwiches that is not a beef product. But, Jerry, if you want to talk specifically on the offsetting of the commodities?

Yes, Bob, you're right in that we don't have a lot of deep discounts on our beef-related products. And that certainly helps the process for us. And that will lessen the impact of the significantly higher beef costs going forward for the balance of the year. But I will say though because of some of the promotions have focused on some value, breakfast as an example with the 2 for $3 biscuits, the 2 for $3 croissant, and the big deal promotion that we have or the Jumbo Deal promotion that we had, those are a little lower margin. They're not substantially lower but the mix has actually hurt us a little bit on the margin line in the first and second quarters. But of course, it would have been a lot worse had we been deep discounting on the burger products. Robert Derrington - Morgan Keegan & Company, Inc.: On the guidance you provide, which we appreciate, the G&A typically you provided to us as a percent. The percent is based on revenue, revenue which includes distribution sales which vary dramatically I think from probably what most of us had expected. Could you consider giving that to us on an absolute basis, a range of a number that is little bit easier to understand and model?

Yes, that's a fair point. I'm not going to give it to you today, but we'll certainly consider that going forward. That's a fair point.

Our next question is from Keith Siegner of Crédit Suisse. Keith Siegner - Crédit Suisse: I just had a question about breakfast. So despite McDonald's launching the Dollar Menu at breakfast, you did have a couple of other initiatives like the breakfast specials you mentioned and talk about how breakfast is the strongest of the daypart. I just want to clarify that, that was dayparts and not product mix for breakfast products. And assuming that it was daypart, how are breakfast products mixing across the whole day? Because I would examine that the promotions have to sell pretty well at lunch and dinner as well. And could that have any impact, say, on check if you got trade down to discounted breakfast products, at lunch or dinner from otherwise higher products?

Yes, I don't have the specifics on top of my head. But generally, we don't see a lot of breakfast outside of the breakfast daypart, I mean up till noon or so. Keith Siegner - Crédit Suisse: Even with an aggressive promotion?

Can you repeat that question? Keith Siegner - Crédit Suisse: As you said, even with an aggressive promotion, it still doesn't mix that high as lunch and dinner?

No, I mean generally what you see at lunch and dinner is the core breakfast product that people are sort of hooked on and are buying at different dayparts, they continue to sell during those dayparts. But the new products and the advertising behind it really draws people into breakfast daypart. Keith Siegner - Crédit Suisse: Just an update on the long-term kind of averages we should be using when thinking about the refranchising program because I don't think we've gotten an update since you changed the program to be five years. We're getting a lot of volatility quarter-to-quarter and that's fine, especially when we get margin accretive nature immediately even if the proceeds are lower. But how should we be thinking about those averages for the last three years of the program?

Yes. Let me -- I'll get you part of the way there. The -- if you look at the full fiscal year we're -- and the midpoint, say, of the proceeds and the gains that we're forecasting, they're certainly lower than what our historical average has been, the proceeds will average about 450 this year and average gains about 325 based upon the midpoint again. But if you look at -- there's really two factors there. One are the 30 restaurants that we sold in the second quarter, that had the gains and the proceeds that we talked about. And we have visibility of one additional larger deal either in the third or the fourth quarter that will also have lower than average proceeds and gains, although not nearly as low as that second quarter deal was. So when you look at the balance of the year, absent those two transactions, we're going to see the balance of the year, with respect to proceeds and gains, look a lot like what our historical average does. And so I hope that helps. And a current preliminary view of 2011 would also suggest the return to more normal proceeds in gains but I will caution you that is very preliminary at this point, and of course, things do ebb and flow.

Our next question is from Tom Forte of Telsey Advisory Group.

On the refranchising in the second quarter and the one that took place early in the third quarter, was there a geographic concentration? I know in the past you talked about, I think, refranchising the whole Santa Barbara market, for example. So is there something specific to the geography of the refranchised locations?

Yes, there was. The deals that closed in the second quarter, Pacific Northwest. And the early third quarter deal was in Central California.

And then, any thoughts on quantifying? With a lot of locations in Texas and California, Texas in particular, the bad weather in the March quarter. Any thoughts on quantifying the drag on comps from bad weather?

Yes. Really difficult to do so we tend not to really look at the weather impact.

We know it's a common excuse, we hate to use it though. But we also lapped it to next year.

And the weather's getting better now.

Our next question is from Bart Glenn of DA Davidson. Bart Glenn - D.A. Davidson & Co.: You talked a little bit about the improving environment for financing for the refranchising process. I was just curious, you're now looking at 200 units that you anticipate you'll refranchise this year. Should we think about it as a faster run rate in terms of number of units that you might be able to refranchise per year going forward?

I think our expectations of doing 70% to 80% franchise by the end of 2013 gets you pretty close to a high 100 through a 200 restaurant run rate anyway. So we're not anticipating anything faster than that going forward.

Our next question is from Matt Van Vliet of Stifel, Nicolaus.

Yes, I am, for Steve West today. I guess just sort of a little more detail on the refranchising expectations. You increased the number of stores expected but you didn't change the gains, is this primarily from I guess the deal that you were just talking about that's expected third or fourth quarter that's not going to have very high average gain?

Yes, it's actually more related to the deal that we just -- the two deals that we closed in the second quarter totaling 30 restaurants. Because selling 30 restaurants there's an average gain of $100,000 a unit doesn't move the average or doesn't move this whole gains number, not that much. As I mentioned, the third or fourth quarter deal, which is also expected to have lower average gains and proceeds, that will be higher though, substantially higher than what the 30 restaurant stores that we closed in the second quarter.

Have there been any changes or can you give us anymore update on what the proceeds are expected to be used for? Or is it just -- continue to be between share repurchases and debt paydown?

Yes, it's the -- I'll give you the standard response, which is we continue to reinvest in the business, both through new restaurant growth and through reimaging our restaurants. And then we'll have to require debt paydown, although I wouldn't expect to pay down debt beyond what's required. And then we still have $47 million worth of share repurchases left and that authorization expires in November of this year.

Our next question is from Larry Miller of RBC.

I just wanted to follow up on the beef pricing right now. Jerry, what's your thought about extending those beef 90s or increasing the percent of coverage? And just your thought on the market trend into the second half. Is it your expectation? Are you going to waive in contract or can you give some color on that?

Yes, Larry, if -- our coverage right now through May is at $1.44 for import 90s. If we could extend that coverage, trust me, we would have already done so. We weren't [ph] (52:04) able to get that coverage to date. We continue to monitor, though. We have our commodity guys looking at that information daily and several times a day. So if we have a chance to jump back in and get some favorable rates on the beef, we will actually take that coverage. What our current guidance has going forward, though, is that the coverage expires in May, when we would have no coverage going forward, which is what's included in our guidance right now.

And then, can you just explain to me the negative margin on the distribution, what that might be and then, should we be planning for that to continue?

You probably should plan on that to continue modestly until the overall sales volume picks up. It's really sales volume against fixed cost. So with the franchisee sales also trending lower on a same-store sales basis, that's what's causing the drag on the margin there.

Our next question is from Conrad Lyon of Global Hunter Securities.

A quick question on the refranchising maybe geared towards Jerry. Have you seen the structure or has the structure of the deals changed, especially with some of the bigger buyers? In that, maybe we see a change in the royalty structure at all, going forward, compared to historical levels?

No. What we do is -- there are, time to time, when we will be able to negotiate a little higher royalty rate from time to time. But we're not planning on -- other than one-off location-by-location negotiation, we are not planning any reduction in our royalty rates.

Our next question is from Joe Buckley of Bank of America.

First on the marketing, again. So the first half of the year, did you say you were able to maintain the media weights, actually spending a little bit less money? Are you spending the same amount of money year-over-year?

No, we did maintain the rates and we spent -- we've maintained the media weights because we did some shifting from national to local.

And then the back half of the year, the incremental $5 million to $6 million, is that because rates are starting to rise? Did you maintain the same weight that you had to [indiscernible] (54:40)?

No, it 's just because of the sales situation, Joe, that we're having to -- yes -- to...

And then a follow-up on the food. Jerry, you talked the 50s sort of thinking plus or minus $1. I think the last data point I saw that was trading at about $1.15. I'm not going to say I understand the spikes and peaks and valleys of the hamburger meat market, but does it have to come down quite a bit for that number would imply for your food guidance to hang together?

Joe, yes, you're right. It is $1.15 now. Remember again, that's going to work itself into our system in about three to four weeks. So we do have limited flexibility with that. But overall, for the entire quarter, we are expecting about $1 and some of that will be due to seasonality. But that's where our current thinking is. Clearly at the stage of $1.15 for the balance of the fiscal year, we're going to have underforecasted beef costs. I don't think it's going to stay there.

And then, last question on the commodities. You shared the chicken plus baked items, roughly the same 20% composition as beef and being down about 6%. Talk about some of the other maybe big areas, what you're seeing like on dairy or soft drink prices, sort of things like that, where you stand?

Sure. Let me tell you some of the other key items. Cheese is probably the other item -- you're looking at cheese and pork that are each about 5% of the total purchase, they're going to be up in the mid double digits, like in the 14%, 15% range in that area. And then what you're going to see on the downside is you're going to see a shortening, which is going to be down low double digits. And you're going to see potatoes, which is actually an 8% spend, that's also going to be down low single digits. So when you do the weighting on all that, Joe, and you also look at beverages, which are basically flat and that's about 10% of our spend, that's how we get comfortable with this 2% and 3% increase respectively, third and fourth quarter.

Our next question is from Chris O'Cull with SunTrust.

Jerry, if my memory is correct, last year in the third quarter, sales started out pretty strong because of the launch of the Mini platform. But then, they really started to fall off about halfway through that quarter. Is that a correct trend?

You have a tremendous memory.

Yes, that's very true, Chris.

On the B90s after the coverage expires in may, what does your guidance assume for B 90s [beef]? And I apologize if...

Let me -- I'll tell you that -- we are in -- after that, we're in the, call it, mid $1.70s range, $1.75, $1.78 in that range.

Our next question is from Jonathan Wade [ph] (58:04).

Did you disclose all your franchisee comps in the quarter?

We did not.

We did not.

And what were they?

We do not disclose that.

And why is that? What is the reason, I mean I'm wondering if they're seeing the same trends you are.

Yes, it's not -- if you look market by market, it's very much aligned with the company.

Yes, they're not materially different.

Yes. We've always just -- we had company because we're a majority company. So at some point, we'll consider shifting.

Yes, I mean we're at 50%, almost 50% here.

Yes, exactly.

You made a comment, in 2011, you expect to return to more normal gains and proceeds. What exactly would you term as normal gain?

Well if you look historically, the gain, call it in the 450 range, plus or minus, and the total proceeds $600,000, again, plus or minus, of what I would consider to be normal. And I'd say where we have the better visibility is in the back half of 2010. And that's what we're seeing for the back half of 2010, absent that one additional larger market deal that I just described earlier.

Our last question, it is from Michael Wolleben of Sidoti & Company. Michael Wolleben - Sidoti & Company, LLC: I was wondering if you guys could just touch on here your confidence in hitting that -- your restaurant operating margins between 15% and 16%, since we're looking at the back half of the year with commodity costs up 2% and 3% and then these comps continue in decline. Should we be leaning more towards the low end of that 15% operating margin?

At the midpoint of our EPS guidance, we're right about the midpoint of that range. So as you get down toward the $1.85 level, if we hit that, God forbid, we'd be more in that 15% range. And if we get north of $2 on our EPS it'd be more than 15% range. But we feel pretty good about that, given where our expense control has been thus far this year. And while beef costs are up, yes, let's also remember that we have 20% of that commodity comp price [ph] (1:00:38), which is trending down 6% for the back half of the year. And of course, we did 15.2% this quarter on a down 8.6% comp.

I think that's all the time we have for today. Thanks for joining us and we look forward to speaking to you next time. Thank you.

Thank you. This concludes today's presentation. You may disconnect at this time.